Business

What Flipkart And Ola Want Is Not Really “Good Protectionism” 

Anirudh Joshi - Dec 12, 2016, 12:34 pm
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What Flipkart And Ola Want Is Not Really “Good Protectionism” 
Snapshot

What the CEOs of Ola and Flipkart seem to be implying is that while they can disrupt the business of taxi drivers and small traders, it is unfair of Amazon and Uber to do the same to Flipkart and Ola.

Bhavish Aggarwal of Ola and Sachin Bansal of Flipkart came together at the recent Carnegie India Global Technology Summit to make a “nationalist” appeal and urged the Indian government to design policies which will favour homegrown companies.

What’s happening in both our industries (is that) there is a narrative of innovation that non-Indian companies espouse but the real fight is on capital, not innovation. The markets are being distorted by capital.
Bhavish Aggarwal, Ola CEO

What we need to do is what China did (15 years ago) and tell the world we need your capital, but we don’t need your companies.
Sachin Bansal, Flipkart CEO

Ola and Flipkart represent the new-age business model – technology-driven businesses which tap into consumer demand, propelled and accelerated by deep-pocket venture funds.

While the venture capital-propelled business model has been around for a while, the huge losses VCs are willing to take before the company turns profitable have their limits. The jury is out on the extent to which the VCs will back these startups.

Uber posted a loss of $1.27 billion on a net revenue of $2.06 billion for the first half of 2016. That is over 50 per cent of the revenue. Amazon India posted a loss of Rs 1,724 crore on a net revenue of Rs 1,024 crore for 2014-15. However, Amazon Inc. is a listed company with a proven business model and profitable revenues.

Ola and Flipkart are following in the footsteps of the loss-led business models of their global competitors. Ola posted a loss of Rs 418.25 crore on a net revenue of 754.87 crore for 2014-15. Flipkart posted a loss of Rs 1,932 crore on an estimated net revenue of 1,200 crore for the same period.

Aggarwal and Bansal are worried that while their global competitors have deep pockets and higher capacity to absorb losses, the VCs who are backing them may not have the same patience, which is now reflected in restricted funding and lower valuations. (Flipkart’s valuation has dipped to $5.54 billion in November 2016 as against $15 billion in July last year.)

Traditional businesses start with measured investments, organic growth and a reasonable amount of time before the investments break even and businesses yield profitable revenue streams. New-age businesses promise to accelerate this entire lifecycle by front-loading significantly higher investments very early with a promise to turn profitable faster by building a higher scale. The VCs are the guiding angels who make this possible. However, when these angels start frowning at the delay in dreams turning into reality, entrepreneurs like Aggarwal and Bansal ask for the government to step in and save them.

We all have the right to ask the government, or anyone else for that matter, for their help to fund our businesses and our dreams.

What bothers one, however, are the multiple dichotomies here.

In June this year, more than 4,000 taxi drivers in Mumbai went on a strike against Ola and Uber. Taxi drivers who participated in the strike complained that their income has come down to one-third of what they were earning earlier (down to Rs 20,000 to Rs 30,000 per month), and with unpaid loan EMIs and household expenses, their livelihood is severely impacted. This is just Mumbai. The overall impact in India is maybe eight to 10 times higher.

In November this year, Confederation of All-India Traders (CAIT) lodged a complaint with the fair trade regulator Competition Commission of India (CCI), who then registered a preliminary investigation against Flipkart for predatory pricing. The CAIT has also urged the commerce and industry ministry to monitor and regulate e-commerce, as well as investigate how the massive discounts are being offered online.

Praveen Khandelwal of CAIT said the association has already approached the commerce ministry. "We do not understand how online retailers gave 60-70% discounts. The prices at which they sold merchandise are lower than our purchase prices. This is a clear case of predatory pricing," he went on to add.

So we have hundreds of thousands of traders all over India whose businesses have been hugely impacted by the advent of companies like Flipkart.

The essence of the argument presented by Aggarwal and Bansal, and those who are supporting them, is this. When it comes to the interests of taxi drivers and traders, the government should stay away. It should allow them to create new companies with disruptive business models because they create value for consumers even if they perennially lose money and lose investors’ money like no tomorrow.

However, when an Amazon does the same thing and burns cash faster than they can, and invests more money than they want to, then the government should step in and help them because their dream of running a billion-dollar company has to stay alive even if they are making considerable losses and firing employees because they made wrong decisions when scaling. It is okay for them to distort the power of capital and drive the taxi drivers and traders out of business but not okay for Amazon and Uber to do the same thing to them and their company.

Some argue in favour of Flipkart and Ola because China supports local companies. Now, the aspect of the government supporting local businesses and promoting industries is a complex subject and has to be backed by long-term strategic thought. The Software Technology Parks of India (STPI) scheme gave all companies engaged in IT & ITES exports incentives for 12 years. The Janata Party decision in 1977 forced the multi-national corporations (MNCs) to manufacture the latest technologies in India. Both these decisions helped Indian Information Technology sector to build capacity and scale and local competitiveness. We must have a policy framework to help Indian companies and promote local interests in the long term on a large-scale in chosen areas.

We need to define what is Indian though. Only the lineage of promoters cannot be the criterion.

Flipkart, for example, is registered in Singapore and a bulk of its investors are global VC firms. You can’t take advantage of all the global laws and global money and then approach the Indian government when other global giants have beaten you at a game they have perfected.

Indian companies using Indian solutions, creating a competitive differentiator and generating long-term value (which includes large-scale jobs) deserve government protection. Patanjali Ayurveda is beating the MNCs at their own game, using indigenous solutions and products and creating large-scale jobs by reviving traditional Ayurveda medical system. If any Indian entity deserves protectionism, it is perhaps Patanjali. It is interesting that while they are promoting Swadeshi, they are not asking the government for protectionism against the MNCs.

So, when Prime Minister Narendra Modi asks Pakistan not to differentiate between ‘good terrorism’ and ‘bad terrorism’, that is a good policy. However, Flipkart’s version of protectionism as nationalism probably means that their ambition of building a billion-dollar company to beat Amazon, and consumers getting artificially cheaper goods because of discounts subsidised by investor money, is more important than the livelihood of lakhs of traders and taxi drivers and their families.

So what Bansal and Agarwal claim to be “good protectionism” is actually “bad protectionism” masquerading as fake e-nationalism and hypocrisy.